Economist: Next Wave of Oil Boom Profits to Come from Housing in Permian Basin

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The oil boom in the Permian Basin has doubled the size of the workforce in two West Texas counties over the last decade, and a further doubling is projected for the next decade, an economist told an energy conference in Denver last week. Peter Elzi, principal and senior economist at THK Associates Incorporated (Aurora, Colorado), told about 50 attendees at a conference on "Emerging Real Estate Opportunities in U.S. Oil & Gas Plays" that companies not in the oil business can still benefit from the boom through housing construction--apartments, homes and hotels--in West Texas' Midland and Ector counties, the center of Permian Basin oil production.

"The Permian Basin has an estimated 50 billion barrels of recoverable oil reserves," Elzi said, adding that about 14% of all current U.S. crude-oil production comes from the Permian. Roughly 1 million barrels of oil per day (BBL/d) were produced in the Permian last year, and production is expected to increase at least 50%, to at least 1.5 million BBL/d by 2018, according to another speaker at the conference, Jim Klingsporn, an analyst at BENTEK Energy LLC (Evergreen, Colorado). For more projections on future U.S. oil production, see July 12, 2013, article - Big WTI Price Penalty Expected by 2018, as U.S. Light Sweet Crude Overwhelms Domestic Refinery Capacity.

"There doesn't seem to be any question that the Permian Basin will be a very active area over the next four or five years," Elzi told conference attendees. Employers in the two-county area expect to add between 16,000 and 19,000 jobs per year for the next decade, pushing overall employment to about 400,000, Elzi said. "We see economic activity in the area peaking in 2018 or 2019," he added.

Wages in Midland and Ector counties have doubled over the last decade, to about $60,000 on a per capita basis, he continued. He predicted local wages will continue rising for the next four to five years.

One thing that that hasn't changed in Midland and Ector counties is the amount of housing, which has barely increased over the last two decades, Elzi said. Last year saw a doubling of residential housing permits issued, and he said more is on the horizon.

The THK economist estimated more than 16,000 oil-related workers in Midland and Ector counties live in some type of non-permanent housing, including hotels, RV parks, "man camps" and other temporary arrangements. Unlike the Bakken Shale, which has numerous temporary "man camps," most of the transient oil-related workers in the Permian live in hotels, he said.

"There is a significant pent-up demand for housing, mainly apartments, in the Permian Basin," he told conference attendees. "The area needs between 4,000 and 7,000 units of new housing to get the oil workers out of hotels." He also expects a number of new hotels to be built over the next decade.

Elzi noted several other important distinctions between the Permian and North Dakota's Bakken Shale:

• As a longstanding oil-producing region, the Permian Basin has an established economic infrastructure of roads, schools, libraries, parks and lifestyle amenities, unlike the Bakken
• The Permian has a 12-month building season, but in the Bakken it's a lot shorter
• Land prices in the Permian are lower than they are in the Bakken
• Building costs in the Permian are close to the national average, unlike the Bakken
• Obtaining financing for building is easier in the Permian compared to the Bakken

"In Texas, there are investors who understand oil production and the Permian; they don't have to be convinced that there's a business opportunity there. That's not really the case in the Bakken," Elzi said.

Turning to the Denver-Julesburg Basin, specifically the Niobrara Shale, Elzi noted the area also needs to add to its housing stock, specifically single-family housing, for the oil-related workers expected to continue coming to the region. But at an estimated 2 billion to 7 billion barrels of recoverable oil, the Niobrara is much smaller than the Permian Basin. Colorado produces about 110,000 barrels of oil per day, making it the 10th-largest oil-producing state, far behind daily production from the Permian, Eagle Ford and Bakken.

And Colorado's political culture may limit the potential upside for companies operating in the Niobrara, Elzi said: "In Colorado, people are freaking out about hydraulic fracturing. There is a lot of local environmental opposition to drilling. Hydraulic fracturing in the Niobrara will get harder, not easier, because too many people in Colorado don't want to believe it's a safe industrial process."

Elzi said that Texas doesn't face as much opposition to drilling from environmental activists. "On the subject of oil and gas production, you don't mess with Texas," he said.

Addressing a persistent concern voiced at the conference--"When will the oil boom end?"--Elzi had this thought: "I'd begin to get concerned when Warren Buffet sells the Burlington Northern Santa Fe (BNSF) railroad." BNSF, owned by Buffet's Berkshire Hathaway (NYSE:BRK-A) (Omaha, Nebraska), has benefitted greatly from the dramatic expansion of oil production from shale formations.

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